The media has presented some extreme cases in the last year of what can happen if you fail to check each and every aspect when buying or renting a property – from sex-offenders as property owners to buildings that fall on the other side of the property line.
These may be extreme examples, but they both underscore the importance of getting to know every aspect of what you are getting as a buyer.
What is due diligence?
Due diligence is described by some as courtship, but a more appropriate comparison might be a background check. Due diligence on a real estate transaction involves a complete investigation of an income-producing property.
A Romanian commercial real estate litigation specialist from Rolegal says that clients who are buying an investment property should use a well-qualified property inspector, consultant, a lawyer, a contractor and their own internal operations people. If the procedure is not followed accordingly it can lead to many problems after the purchase has been done instead of before
An organized approach to due diligence begins with putting together the right team for the job, and realizing that the process can't be rushed - the process can and should take from between 60 days and 90 days. Less than 30 days isn't enough time to do it in a meaningful fashion.
Given that, experts say, there are about five topics that generally need to be addressed in proper due diligence and you need to keep an eye on them when looking for a firm that offers Real Estate Due Diligence packages
1. Environment - A negative environmental report does not necessarily kill a deal. It can become a great leverage tool in negotiating a price.
"It could be underground storage tanks leaching chemicals from a neighboring property. It can be highly sensitive and hard to figure out."
2. Current leases — When buying a shopping center or an office building or apartments, you need to know what the obligations are to continue the leases not just whether they exist, but also for how long. This includes any special clauses attached to the leases.
3. Pending claims involving the property, including compliance with the ADA.
4. The actual inspection of the property - some inspectors are qualified to inspect a property, and some aren't
5. Security - includes how a buyer plans to physically secure the property to guard against theft and intrusion, and how to prevent people from being injured on site.
It's an issue, depending on what you do and whether you have an office full of people or a warehouse.
Due diligence is necessary because when any major facts are not adequately known in advance, deals can then get killed. The buyer must make sure there are no major problems with the property that haven't been disclosed to them by the owner.